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Question

Difficulty: EasyBalance Sheet Classification of Assets and Liabilities

When preparing the statement of financial position (balance sheet) for a sole trader, which of the following items must be classified under current liabilities?

  1. Accrued rent payable at the end of the accounting periodAnswer
  2. B
    Owner's cash drawings withdrawn during the financial year
  3. C
    Owner's personal electricity bill paid from private funds
  4. D
    Office equipment acquired for long-term operational use

Answer

Accrued rent payable at the end of the accounting period
Accrued rent payable is an expense incurred during the period but unpaid at the reporting date. Since it must be settled within the operating cycle or twelve months, it is classified as a current liability.

Step-by-Step Solution

1
Identify the nature of unpaid accrued expenses at year-end.
Accrued rent represents a service already consumed during the financial period for which payment has not yet been made.
Because settlement is due within one year, it is categorized as a short-term liability.
2
Evaluate the remaining options against balance sheet classification categories.
Drawings reduce equity, personal transactions lie outside the entity, and office equipment is a non-current asset.
Proper presentation in the balance sheet requires separating external short-term liabilities from equity adjustments, non-business transactions, and long-term assets.

Key Concept

Classification of Current Liabilities in the Balance Sheet
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Topics

Balance Sheet Classification of Assets and Liabilities